ERISA requires that all plans have a written plan document and summary plan description. In addition to describing the benefits, the written plan document must also establish: a funding policy, a procedure for allocating administrative and management responsibilities, a procedure for amending the plan, and the scheme for payment of contributions and benefits.
For welfare plans, plan sponsors have customarily relied on the benefit booklets prepared by the insurer (for insured plans) or the third party administrator (for many self-insured plans) as both the plan document and the summary plan description. The benefit booklets and the schedules of benefits usually provide a full and detailed description of the benefits that are covered and excluded as well as requirements for preauthorization of treatment, filing claims and appeals, and the costs (deductibles, co-pays, out of pocket maximums) that participants pay. But, the booklets, which are not prepared by the plan sponsor, generally do not include certain required ERISA provisions such as identification of fiduciaries, allocation of responsibilities, funding, claim procedures, or provisions that protect the employer such as those provisions that reserve the plan sponsor’s right to amend or terminate the plan, provide for subrogation and recovery of overpayments, address lost participants, and stipulate the absence of any guarantee of employment. Similarly, the benefits booklets do not typically include all of the information that the DOL regulations require to be included in a summary plan description (e.g., name, address and employer identification number of the plan sponsor, name and address of the plan administrator and others who have fiduciary and administrative responsibilities, plan number, agent for service of legal process).
Plan sponsors can fill in the gaps in the benefit booklets by adopting a wrap plan document that contains the missing information required for both the plan document and the SPD. The wrap plan document also incorporates by reference the detailed terms of the benefit booklets and certificates, which are included attachments. In this way, the wrap document can satisfy both the plan document and summary plan description requirements. If the document is intended to serve as both the plan document and the SPD, it is advisable to state clearly that the wrap document is intended to be both the plan document and the SPD.
A wrap document can also be used when a plan sponsor wants to treat several welfare benefit plans or programs as a single plan. Many plan sponsors treat different welfare plans, such as group health (medical, dental and vision), long and short-term disability, group term life insurance, as a single plan and file one Form 5500 although each program has a separate insurance policy or contract. A wrap document permits the sponsor to incorporate the several contracts and certificate into a single plan document and establish that it has a single plan for Form 5500 reporting purposes.
Plan sponsors should review their documents to determine whether they need a wrap document to satisfy ERISA’s plan and summary plan description requirements.
Whenever an employer wants to implement a wellness program, we are always compelled to advise them that the Equal Employment Opportunity Commission (EEOC) has yet to give us official guidance on the application of the Americans with Disabilities Act to wellness programs. The issue under the ADA is that, generally speaking, wellness programs usually involve disability-related inquiries, as that term is defined under the ADA. As such, to satisfy the ADA’s requirements, in the EEOC’s view the programs have to be voluntary. A program is voluntary for this purposes as long as the employer neither requires participation, nor penalizes employees who do not participate.
There was a 2009 informal discussion letter that was released and then subsequently revised wherein the EEOC, in the first version, said that compliance with the HIPAA nondiscrimination rules would make a program compliant with the ADA. The letter was subsequently revised to say that the EEOC has not ruled on whether compliance with HIPAA would meet compliance with the ADA.
The EEOC recently released a letter from January of this year involving a wellness program for employees with diabetes. The program waived the annual deductible for employees who met certain requirements, such as enrollment in a disease management program or adherence to a doctor’s exercise and medication recommendations. The EEOC said that reasonable accommodations would have to be made for those who could not meet the wellness program’s standard due a disability (as broadly defined in the ADA). This is, of course, similar to the reasonable accommodation standard under the HIPAA nondiscrimination rules. The EEOC yet again did not express an opinion on what level of inducement would cause a wellness program to be involuntary.
In fairness, these discussion letters are not official, binding guidance, so they would make a bad place for the EEOC to provide an opinion on such an important issue. However, their failure to address it through formal regulation remains somewhat troubling.
Interestingly, when courts have considered wellness programs under the ADA, they analyzed wellness programs differently. They have generally held that the wellness programs are part of a bona fide benefit plan, and thus fall under a separate ADA exemption that does not implicate the voluntariness issue. Of course, there are limitations to those holdings, as described in our prior post on one of those cases.
The bottom line is that, in designing a wellness program, employers should always consider the ADA risk involved before proceeding.
For plan years beginning on or after January 1, 2014, a health plan cannot impose a waiting period of more than 90 days. Earlier this month, the Departments of Labor and Health and Human Services and Treasury (the “Departments”) followed up their prior guidance on the 90-day waiting period maximum with a joint set of proposed regulations.
90-Day Maximum Waiting Period
Consistent with prior guidance, the proposed regulations define a waiting period as the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the health plan can become effective. For counting purposes, all calendar days are counted beginning on the enrollment date (including weekends and holidays). If an employee has satisfied the eligibility requirements under the plan, coverage must begin once 90 calendar days has elapsed (subject to the employee’s completion and submission of the appropriate enrollment forms).
The Departments confirm that no de minimis exception exists that would permit employers to equate three months with 90 days. Therefore, plans with a three-month waiting period will need to be amended for the 2014 plan year. In addition, plans with a 90-day waiting period in which coverage begins on the first day of the month immediately following satisfaction of the waiting period will have to be amended. Employers that continue to prefer a first day of the month start date for coverage rather than random dates throughout the month could consider implementing a 60-day waiting period. Any coverage that begins on the first day of the month following the completion of the 60-day waiting period will never exceed the 90-day maximum.
The imposition of other eligibility criteria remains permissible as long as they are not designed to avoid compliance with the 90-day maximum limitation. For example, a plan can provide that the employee must attain a specific job category before becoming eligible to participate in the health plan. However, in cases where eligibility is contingent upon an employee completing a certain number of hours of service within a specified period, the hours of service requirement cannot exceed 1,200 hours and must be applied only on a one-time basis.
In the case of variable hour employees, the proposed regulations provide that an employer can take a reasonable period of time, not to exceed 12 months and beginning on any date between the employee’s start date and the first day of the next calendar month to determine whether an employee meets the plan’s eligibility requirements. The employer will be deemed to be in compliance with the 90-day maximum limit if the employee’s coverage (if determined eligible for coverage during the measurement period) is effective no later than 13 months from the employee’s start date, plus the time remaining until the first day of the following month if the employee’s start date is not the first day of the month.
Note; however, that employers should be aware that compliance with the proposed regulations governing application of a 90-day waiting period does not necessarily preclude the imposition of the play or pay penalty for failure to provide coverage to full-time employees within three months of their date of hire under the employer mandate. Accordingly, any waiting period should be designed to take into account the requirements under the proposed regulations on waiting periods as well as the regulations applicable to the employer play or pay mandate.
Certificates of Creditable Coverage
With the elimination of pre-existing condition exclusions for plan years beginning on or after January 1, 2014, the Departments also announced that HIPAA Certificates of Creditable Coverage will be phased out by 2015. However, plan sponsors must continue to provide Certificates through December 31, 2014 since individuals enrolling plans with plan years beginning later than January 1 may still be subject to pre-existing condition exclusions up through 2014.
Courts have recently seen a flurry of activity from for-profit corporations challenging the Affordable Care Act’s contraceptive mandate, which became effective January 1. These employers claim providing female employees with certain types of FDA-approved contraceptives violates the owners’ right to free exercise of religion.
Do for-profit corporations have a right to free exercise of religion, at least with respect to providing controversial contraceptives to employees? While we’re waiting for that issue to make its way to the Supreme Court, which it most certainly will, federal circuit courts are divided with respect to issuing temporary injunctions until the substantive issues are decided. The Supreme Court weighed in on the Hobby-Lobby case in December 2012, denying its request for an injunction while the company’s general challenge was pending, but it did not address the underlying, controversial issues, such as whether a corporation can even exercise religion in the first place. Circuits courts are left facing a number of injunction requests and the results vary by circuit. The Third, Sixth, and Tenth Circuits have generally denied injunction requests, while the Seventh and Eighth Circuits seem open to issuing temporary injunctions. See Conestoga Wood Specialities Corp. v. Sebelius (3d Cir., February 7, 2013); Autocam Corp. v. Sebelius (6th Cir., December 28, 2012); Grote v. Sebelius (7th Cir., January 1, 2013); Annex Med. v. Sebelius (8th Cir., February 1, 2013); Hobby Lobby Stores, Inc. v. Sebelius (10th Cir., December 20, 2012; aff’d December 26, 2012).
The general standard for granting a temporary injunction in this type of case is whether the plaintiff has a reasonable likelihood of success on its claim, here, the standard being whether the mandate violates an employer’s right to free exercise of religion under the First Amendment or Religious Freedom Restoration Act. Since no circuit court has considered these claims, whether an employer has a reasonable likelihood of success is unclear. One of the key differences between circuits is whether courts accept at face value an employer’s claim that the mandate constitutes a substantial burden on its right to free exercise of religion or whether the court should delve deeper and decide if the employer has a reasonable likelihood of success on the underlying claims. The Autocam court pointed out that the divergence of district courts on this issue establishes the possibility of success. However, since the employer did not demonstrate more than a possibility of success, the court denied the injunction. The Annex Med. court, however, stated that an employer shows a substantial burden on its right to free exercise of religion simply by saying so, and thus granted the injunction.
Topping off the debate, a bill to repeal the portion of the mandate requiring employers to provide emergency contraception was introduced in the U.S. House of Representative on March 5. One of the sponsors argued that Americans were being forced to choose between religious convictions or breaking the law. While the legislation has little chance of being passed, it demonstrates that the contraceptive mandate is still an important issue for many employers and the debate is unlikely to be settled until the Supreme Court addresses the complex, underlying issues.
We thank our Intern, Will Kim, for his help in preparing this post.
Yesterday, the Ninth Circuit issued an opinion in Tibble v. Edison International (Case: 10-56406, 03/21/2013), affirming the Central District of California district court’s ruling in a 401(k) fee case brought under ERISA. The district court had rejected most claims but had entered judgment totaling just over $300,000 for the plaintiff beneficiaries on claims regarding the selection of certain mutual fund investment options, where lower-priced share classes were available in the same funds. Highlights from the decision include:
Statute of Limitations
- The Ninth Circuit rejected a “continuing violation theory” in favor of a bright-line rule that the act of designating an investment for inclusion starts the running of ERISA’s six-year SOL.
- Beneficiaries did not have “actual knowledge” of the alleged deficiencies in the process for selecting retail class mutual funds for the plan’s investment line-up, and, therefore, ERISA’s three year SOL does not apply.
- The panel also held that Section 404(c) (a “so-called” safe harbor that can relieve a plan fiduciary from liability arising from the investment choices made as a direct and necessary consequence of a participant’s exercise of control) did not preclude a merits consideration of plaintiffs’ claims.
- The panel declined to consider defendants’ arguments that class certification was improper since this issue was raised for the first time on appeal.
Revenue Sharing and Standard of Review of Fiduciary Breach Claims
- The Ninth Circuit panel affirmed the district court’s grant of summary judgment to defendants on the claim that revenue sharing between mutual funds and the administrative service provider violated the plan’s governing document and was a conflict of interest. Looking to the Supreme Court’s prior holdings (Firestone Tire & Rubber Co. v. Bruch, Metropolitan Life Insurance Co. v. Glenn and Conkright v. Frommert) on standard of review and agreeing with the holdings of the Third and Sixth Circuits (and rejecting the rulings of the Second Circuit), the Ninth Circuit panel held that, as in cases challenging denials of benefits, a “usual” abuse of discretion standard of review applied to this case which concerns potential violations of fiduciary duties and conflicts-of-interest because the plan granted interpretive authority to the administrator.
Use of Mutual Funds, Short-Term Investment Fund and Unitized Stock Fund
- The Court also ruled that defendants did not violate their duty of prudence under ERISA by including in the plan’s investment menu (i) mutual funds, (ii) a short-term investment fund “akin” to a money market fund, and (iii) a unitized company stock fund.
Finally, the panel affirmed the lower court’s holding, after a bench trial, that the defendants were imprudent in deciding to include retail-class shares of three specific mutual funds in the plan menu because Edison failed to investigate the possibility of institutional-class alternatives.
Target date retirement funds generally refer to a related group of investment funds that automatically rebalance and become more conservative as a participant moves towards a designated retirement year. Many 401(k) and profit sharing plans use target date retirement funds as the qualified default investment alternative (QDIA). In that case, when a participant fails to make an affirmative election regarding how his or her qualified defined contribution plan accounts should be invested, contributions are allocated to a target date fund based on the date the participant will attain retirement age, usually designated as age 65. Use of a QDIA relieves a plan fiduciary of liability related to the return generated on the investment fund. Also, participants who do not want to actively manage their accounts are increasingly using target date retirement funds.
In February 2013, the Department of Labor (DOL) issued tips for ERISA plan fiduciaries regarding the selection and monitoring of target date retirement funds in an ERISA plan. The fact sheet can be found on the DOL’s website. The list of tips includes the following:
- Establish a process for comparing and selecting the target date retirement funds
- Establish a process for the periodic review of selected funds
- Understand the fund’s investments – the allocation in different asset classes, individual investments, and how these will change over time
- Review the fund’s fees and investment expenses
- Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan
- Develop effective employee communications
- Take advantage of available sources of information to evaluate the fund and recommendations you received regarding the fund selection
- Document the process
The DOL fact sheet explains each of these tips in greater detail and provides a roadmap for complying with ERISA’s fiduciary duty requirement for selecting and monitoring these types of funds. You can use these tips to ensure compliance by your ERISA plan fiduciaries.
In this recently reported case, one Dr. Sutardja, a recipient of an allegedly discounted option, sued to recover 409A taxes imposed by the IRS. The case does not decide whether the option was discounted, but Dr. Sutardja argued that his option, even if discounted, shouldn’t be subject to 409A.
Essentially, he tried to argue that (1) the grant of the discounted option is not a taxable event, (2) stock options aren’t “deferred compensation,” (3) he didn’t have a legally binding right until he exercised the option, or (4) 409A couldn’t apply to the discounted option. Those familiar with 409A will sigh upon reading the list since clearly none of these arguments holds any water. Discounted options are subject to 409A and must have fixed dates for exercise and payment.
The interesting part of the case, though, was the government arguing that Dr. Sutardja did not have a legally binding right to the supposedly discounted option until it vested. This is an interesting argument for the government to make because the 409A regulations themselves say:
A service provider does not have a legally binding right to compensation to the extent that compensation may be reduced unilaterally or eliminated by the service recipient or other person after the services creating the right to the compensation have been performed. … For this purpose, compensation is not considered subject to unilateral reduction or elimination merely because it may be reduced or eliminated by operation of the objective terms of the plan, such as the application of a nondiscretionary, objective provision creating a substantial risk of forfeiture. 26 C.F.R. 1.409A-(b)(1)
Generally speaking, before an option vests, it is subject to a substantial risk of forfeiture. This means the opportunity to buy stock could be lost if the recipient leaves employment or service with the granting company before it vests. Applying that analysis to the above language, the legally binding right to an option is created when it’s granted, not when it vests.
In the end, the argument doesn’t amount to much because any portion of the option that vested after December 31, 2004 is still subject to 409A and its stringent taxes. However, the case is interesting in that it shows that the IRS has begun enforcing 409A. It will also be interesting to see if the government’s argument in this case is used against it in future cases.
Unless you’ve been under a proverbial (or actual) rock for the last several months, you are probably aware that the health reform law has a really big tax that could hit employers for not offering (or not offering good enough) health coverage to their full-time employees and dependents, referred to as play or pay (or “shared responsibility”) rules. We’ve discussed the proposed regulations previously here. But starting with this post, we are going to cover these rules in digestible portions. This will help you see some of the finer points of the rules, without having to swallow the entire regulations in a single sitting. In this first post, we’ll cover how you determine full-time employees (so you know who has to be offered coverage effective January 1, 2014)in a Q&A format. It’s worth noting the rules discussed here technically apply to all ongoing employees (we’ll touch on new hires later).
Q: So what’s full time?
For this purpose, “full time” means working an average of 30 hours per week or 130 hours per month.
Q: How do I determine if someone works an average of 30 hours per week?
To determine if someone is full-time, you measure his or her hours over a period (called the “standard measurement period”). Then you take some time to do the math to figure out who is full-time and make the offer of coverage (this is the “administrative period”). Finally, you treat them as full-time (or not) for a specified length of time (called the “stability period”).
Q: Okay, but what if I’m absolutely, positively, no-doubt-about-it sure that someone is going to work more than 30 hours per week?
Even if you know that someone is for sure going to be full-time, you still are technically treated as counting his or her hours, whether or not you actually count them. That means that, if you don’t want to count someone’s hours and you know she will be full-time, you must treat her as full-time during your “stability period,” even if her hours are reduced during that period.
Q: What if I’m absolutely, positively, no-doubt-about-it sure that someone is going to work less than 30 hours/week (like my deadbeat cousin Harry)?
You should probably still his or her hours too. Even Harry’s. That is because, if you are wrong, and your employee goes on the Exchange and gets subsidized coverage, you could be hit with penalties.
Q: So what’s standard measurement period?
The standard measurement period is a period where you measure someone’s hours. It can’t be longer than 12 months.
Q: Do I have to use the same standard measurement period for all employees?
No. You can vary the standard measurement periods. You can have periods of different lengths, and different starting and ending dates, for the following categories of employees;
(1) union v. non-union
(2) each group of union employees
(3) salaried v. hourly
(4) employees whose primary place of employment is in different States
Q: Once I count the hours, then what do I do?
If you determine someone worked at least 30 hours/week or 130 hours per month during the standard measurement period…
Q: Sorry to interrupt, but can we come up with an abbreviation for “standard measurement period”? How about SMP?
Q: So now, back to my earlier question…
Right. If you determine that someone worked at least 30 hours/week or 130 hours per month during the SMP, then you have to treat him as full-time for the stability period. The stability period for these full-timers must be at least 6 months and cannot be shorter than the SMP.
Q: What if it’s Harry?
Assuming Harry (or anyone else) doesn’t work at least 30 hours/week or 130 hours per month during the SMP, then you are not required to offer him coverage for the following stability period. In this case, the stability period cannot be longer than the SMP.
Q: Do I have to figure this all out in one day and turn around and make an offer of coverage and somehow do all my enrollment and get the information to my carrier or TPA and start offering coverage IMMEDIATELY?!?!?
Calm down. You can have an administrative period of up to 90 days to count the hours and make the offer of coverage. The administrative period begins at the end of the SMP and ends at the beginning of the stability period.
Q: Can you give me an example?
Say you have a calendar year plan, you might want to have an SMP for ongoing employees that starts on October 15 of one year and ends on October 14 of the following year. Then you would have from October 15 through December 31 as your administrative period. And your stability period could be the calendar year.
Q: What if a full-time employee comes to me during the stability period and asks to have his/her hours cut?
You still have to treat the employee as full-time for the rest of the stability period.
Q: And if Harry decides to get off his tukus and actually do full-time work for a change?
You can treat Harry as not full-time for the remainder of that stability period. (The same rule applies regardless of whether the employee is not full-time due to sloth or any other reason.)
Q: What if I have payroll periods that don’t perfectly line up with a month or year?
If you pick an SMP, like 12 months, and you have weekly, every-other-week, or semi-monthly payroll periods, you can start at the beginning of one payroll period instead of a specific date. To do this, either the first payroll period needs to include the beginning date of your SMP or the last payroll period needs to include the ending date of your SMP, but not both.
Q: OH MY GOSH! I have a calendar year plan and I want to use a 12-month SMP, but it’s too late! This stuff is effective January 1, 2014! What do I do?
Calm down! It’s not too late. For this year only, the IRS is allowing a one-time shorter SMP for those employers wanting to use a 12-month SMP. The transitional SMP must not be shorter than six months, has to start by July 1, 2013, and has to end no more than 90 days before the first day of the 2014 plan year. So for example, if you have a calendar year plan, you could start counting April 15, go through October 14, for your transitional SMP, and then have an administrative period through December 31.
Q: What about new hires? And counting hours? And fiscal year plans? I have so many questions!
We’ll cover those in a future post.